For a few years now, the distribution of dividends has been subject to the standard rate of 30% withholding tax. Together with the increase in the withholding tax, several regimes were created that allow the distribution of profits at reduced rates under certain conditions.
We will zoom in specifically on the VVPRbis scheme and the liquidation reserve system.
VVPRbis for young companies
VVPRbis stands for ‘Verminderde Voorheffing/Précompte Réduit en bis’ (Reduced Withholding Tax revised), as a similar regime already existed. This regime applies to the issue of new shares by small companies after 1 July 2013 as a result of a cash contribution at the incorporation or an increase of the capital.
Profit allocations linked to these shares benefit from reduced withholding tax under certain conditions:
- 20% for dividends paid or allocated from the profit distribution from the second financial year after the contribution.
- 15% for dividends granted or allocated from the profit distribution of the third and following financial year after the contribution.
- 30% (no reduced rate) for liquidation bonuses.
At the end of the three-year waiting period, the profit reserved in the previous years can, in principle, be paid out in one lump sum. And, from then on, the profit of that fiscal year each year.
Shorter waiting period for an interim or intermediate dividend?
As a reminder:
- An interim dividend is calculated on the result of the current financial year.
- An intermediate dividend is calculated from the available reserves and the profit carried forward from previous financial years.
Both dividend payments are only included in the profit distribution for the current financial year, however. The profit distribution for a given financial year is the decisive factor in determining the withholding tax rate. Payment can thereby be made earlier.
Thanks to the technique of interim or intermediate dividends, a de facto distribution can be carried out one year earlier at reduced rates. This has now been included in a circular dated 23 April 2021. The Minister of Finance has also confirmed it, albeit less emphatically.
As an illustration
Suppose a company is incorporated on 1 June 2018, with its first abbreviated financial year ending on 31 December 2018. A payment of 15% withholding tax would be possible through the distribution of profits from the third fiscal year after incorporation, i.e. fiscal year 2021. This is only to be decided at the annual meeting that will take place in the spring of 2022.
If an interim or intermediate dividend is decided on during the course of 2021, this will be allocated to the distribution of profits for financial year 2021. It is not necessary to wait until the annual meeting in 2022 to make a payment at a reduced rate of 15%.
Liquidation reserves for older companies
Small companies can also transfer their after-tax profits from the current financial year to a so-called 'liquidation reserve’. The creation of such a reserve is subject to a 10% tax at that time.
Withholding tax is payable on the distribution of this liquidation reserve at the following reduced rates:
- 20% if the affected reserve has been maintained for less than five years and has been created from assessment year 2018, which was previously 17%.
- 5% if the affected reserve has been maintained for more than five years.
- 0% if the distribution is made as a result of the liquidation of the company, regardless of whether the reserve has existed for more or less than 5 years.
The above time limits commence on the last day of the taxable period in which they were created. Therefore not on the date of the general meeting that decides on the profit distribution.
The Minister of Finance confirmed that the 5% rate is applicable if the distribution is carried out by means of a dividend payment at the regular annual meeting of the fifth fiscal year following the creation of the reserve. For accounting purposes, there is therefore a debt with regard to the shareholders at the closing date. And this is maybe just one day short of meeting the term requirement.
As an illustration
Suppose that a company posts a liquidation reserve for the financial year ending 31 December 2016. This is decided by the general meeting in the spring of 2017.
During the general meeting relating to the financial year of 31 December 2021, it is decided to distribute a dividend from this liquidation reserve. This general meeting will take place in the spring of 2022.
The liquidation reserve will no longer be recorded in the financial statements of 31 December 2021, but will be a debt to the shareholders.
The 5-year term can be deemed to have been met, as the general meeting takes place in 2022.
It is important to note that the 5-year waiting period starts running again each time a liquidation reserve is created. Only the profits from 5 years earlier can be distributed each year. This is where the liquidation reserve differs from the VVPRbis scheme.
Don't forget the WVV
The new Companies and Associations Code (WVV: Wetboek van Vennootschappen en Verenigingen) imposes stricter rules on dividend distributions with regard to the documentation of the so-called liquidity and solvency test for the BV and the CV.
The tax authorities also strictly monitor dividend payments for which a company takes out a loan from an external party or the shareholder. The interest deduction on such loans can be refused if it is insufficiently demonstrated that the loan that results in the dividend distribution was taken out in the interest of the company.
Settling for less?
The fact that the tax authorities accept the earlier distribution of profits under the VVPRbis regime by way of an interim dividend or dividend is good news. Many companies are waiting impatiently to distribute these reserves.
The current economic climate and the possibly very difficult budgetary exercise that is ahead of us could lead to new and less favourable tax measures. The withholding tax rate is thereby an easy and well-known prey. And, in particular, the reduced tariffs linked to the VVPRbis scheme and the liquidation reserve.
It is therefore best to compare the advantages and disadvantages of a possible early distribution. We will be happy to assist you, so please don’t hesitate to contact us.